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Are Swiss watch makers too fast in mocking Apple?

Though Apple Watch sales haven’t really clocked up, those of mid-priced Swiss watches slowed 9 per cent in the first 11 months of 2015.

An iPhone and an Apple Watch on display in San Francisco last September. (BECK DIEFENBACH / REUTERS)

By Bloomberg

Fri., Jan. 22, 2016

Swiss watchmakers are starting to mock Apple over its attempt to muscle into their industry. While it’s true the Apple Watch hasn’t set the world alight since going on sale in April, the horologists shouldn’t be complacent.

At Geneva’s watch fair this week, H Moser, a small Swiss brand, unveiled a 24,900 Swiss franc ($24,666 U.S.) mechanical spoof of the Apple Watch—with none of the functionality. It doesn’t let you “gossip,” “send beautiful sketches created on a two- inch screen” or “share your heart rate,” the company said, but “it is something you can pass to your children one day without having to upgrade it.”

The priciest end of the market can afford to scoff a little (even a gold Apple Watch is never going to compete with a top- of-the-range Jaeger-LeCoultre), but bigger companies such as Swatch are much more exposed.

Bloomberg Intelligence estimates that exports of mid-priced Swiss watches (those costing between 200 francs and 500 francs) struggled the most in the first 11 months of 2015, falling 9 per cent. That’s the price point of the basic Apple Watch, and suggests that for all the Swiss mockery, the U.S. upstart is putting a dent in sales.

Two-thirds of Swatch sales are from products that cost less than 1,000 francs, according to Exane BNP Paribas.

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So while the Apple Watch hasn’t been an instant hit like the iPhone or iPod, it has to be taken seriously. Apple doesn’t break out watch sales, but it does say that all of the last fiscal year’s 20 per cent growth in its “other products” line—including Apple TV, iPods, Beats headphones and accessories—was from watches.

Plus it’s the market leader for smartwatches, with a projected 58.3 per cent share in 2015, according to researchers at IDC. The market is also expanding: IDC estimates 88.3 million smartwatches will be sold in 2019, up from 21.3 million in 2015.

In fairness, Swatch’s range of cheaper products offers some protection from the turmoil in China and a sharp drop in demand in Hong Kong for luxury goods, with exports to the region falling 23 per cent in November. That explains why its shares have performed slightly better recently (down 6 per cent since the New Year, compared to an 11 per cent fall at Richemont), though a price to future earnings multiple of 13.3 times is still below peers.

But while the problems in Asia and the strong Swiss currency have been of more concern for watchmakers recently, competition from Apple will only intensify, with the tech giant now trying to create luxury watches with broad appeal.

Take the Apple Watch developed in partnership with French luxury group Hermes, which comes closer to blending a classic style with cutting-edge technology. It’s not perfect—it’s still pretty cumbersome — but it looks good. Prices range from 1,000 pounds ($1,427 U.S.) to 1,350 pounds. That’s about the same as an average luxury handbag. Not cheap, but not entirely out of reach, and again in a price range that will bother Swatch.

And it’s not just Apple’s timepieces that worry the industry. Fossil makes watches for brands such as Michael Kors, DKNY and Marc Jacobs, which also compete with the Apple Watch on price. But Michael Kors’ CEO says the iPhone 6’s popularity is having as much of an impact on sales, as younger customers use its clock rather than own a watch at all. (Fossil shares fell 67 per cent in 2015, making it the worst performer in Bloomberg Intelligence’s luxury peer group.)

And despite the more relaxed tone in Geneva this week about Apple’s threat, the watchmakers are still taking steps to meet the challenge head on. Swatch is going on the offensive with the Bellamy, a watch that can make contactless payments. Then there’s the $1,500 (U.S.) smartwatch from LVMH’s TAG Heuer, modeled after the classic Carrera. If customers decide they don’t like it, they can swap it for a mechanical model after two years.

Traditional watchmakers would no doubt like to make the whole smartwatch phenomenon disappear in similar fashion. Unfortunately for them, that isn’t going to happen.

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